The pandemic has cemented mass transition from traditional to alternative finance in the UK. Emma Lovell, CEO of the Lending Standards Board tells Douglas Blakey how voluntary best practice standards can provide the framework for alternative lenders to keep on top of risks.

A pandemic driven cash flow crisis among business and the rise of fintech and challenger banks is spurring the rise of alternative lending models. The model is now worth around £6.26bn.

RBI: Alternative lending, while creating opportunities, brings new risks. How can the industry respond to the current regulatory environment?

Emma Lovell, chair of the LSB:

Alternative lending has the potential to diversify finance, widen economic inclusion, and increase competition.

Yet the current lack of regulation and universal standards around the alternative lending market creates potential challenges for ensuring good customer outcomes. 

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Voluntary best practice standards provide the framework for alternative lenders to keep on top of risks not captured by legislation whilst utilising opportunities. 

RBI: What sort of alternative lending trends are gaining momentum and how can their respective risks can be mitigated. And are non-bank lenders up for the SME challenge?

Emma Lovell:

The digitalisation and democratisation of finance has accelerated with digital-native alternative lenders tailoring their consumer products to SME needs. 

This comes at a time when a quarter of UK SMEs say they are in the midst of a cash flow crisis, three quarters are unable to access traditional finance, and 50,000 businesses are going insolvent annually due to cash flow problems. 

Onboarding business customers in difficult circumstances requires alternative lenders to have appropriate governance structures and processes in place to support turnaround opportunities.

Resuscitating businesses and reducing default risks partly hinges on lenders being able to refer struggling SMEs to turnaround professionals before it is too late. 

Without proper governance, oversight and training, at-risk customers could slip under the radar or be inadequately signposted in a way that increases the risk to lender and business customer alike. 

Alternative lenders should have an overarching assurance and oversight framework, embedding a set of processes based on professional turnaround expertise to drive consistent best-practice in rescuing struggling firms. 

RBI: What about the growth of Buy Now, Pay Later and the issue of vulnerable customers?

Emma Lovell:

Buy Now Pay Later is another alternative lending model experiencing a surge in popularity due to the pandemic and its associated E-commerce boom. The seller gets instant payment, increased cart value, higher conversion rates and more footfall; while the consumer gets more affordable solutions that increase their purchasing power.  However, without any way of knowing the level of borrowing under this product type or affordability assessments, BNPL presents the risk that vulnerable customers may over-commit themselves, fall into financial difficulty or that it will compound an existing issue. 

Part of the problem is that warning signs among vulnerable customers can be hidden in seemingly innocuous consumer behaviour, such as use of BNPL for essential spending in supermarkets.  

RBI: In the absence of regulation, what approach ought firms to take?

Emma Lovell: Firms should consider working towards best practice standards which can help identify red flags in customer data. This could inform a smart, data-driven customer service that anticipates, identifies, and responds to financial difficulties through pre-emptive measures such as financial education, and reactive measures such as payment plans, or signposting to third-parties for specialist assistance.  

RBI How is embedded finance transforming the landscape?

Emma Lovell: It is transformational. This model gives companies the opportunity to offer customers a one-stop-shop suite of financial products and services without the need for a banking licence. Against a backdrop of increasing consumer appetite for instant, embedded finance, firms will have to work to similar timetables with their products. This is where tracking the digital customer journey to ensure good outcomes do not waver, will be key.  

Without having methods in place to track the whole customer journey, such as customer journey reviews, how will these firms know how their customers are being treated, and how will they identify what steps need to be taken to mitigate any risks? 

RBI: Is there scope for the FCA to expand its remit and is there industry appetite for such a move?

Emma Lovell: By identifying areas where the policy, process, design, or delivery of the journey are not adequate, firms can gain a better understanding of areas for improvement across a variety of channels – and achieve good customer outcomes as a result. 

Recent research reveals that 45% of SMEs with plans to grow in the next 12 months are concerned about using alternative finance providers, partly due to fears over a lack of regulation. There are growing calls for the FCA’s remit to be expanded to encompass the alternative lending market. 

All lenders should consider working towards best practice frameworks to keep pace with the latest trends and ensure the best outcome for their customers and should continue to be adopted alongside statutory regulation, to raise the bar on base line standards.  

Working towards standards in this space would also incentivise and inform collaboration via the sharing of knowledge, expertise, and insights between regulators, traditional and challenger banks, and alternative lenders. This would drive sector-wide progress whilst supporting better customer outcomes and building confidence and trust between customers and firms, ensuring alternative finance delivers on its promise of democratising finance for all.